October 10, 2013
Michael D'Addio, Tax & Business Services Principal, Quoted in Businessweek Article "Tax Realities for Self-Employed Who Get Obamacare Subsidies"
By Karen E. Klein
Since I wrote a recent explainer about government subsidies for self-employed individuals who purchase health coverage through the Obamacare insurance marketplaces, many readers have followed up with tax-related questions. (In a nutshell, the Affordable Care Act subsidies I described are available to individuals making up to about $45,000 annually and four-person households bringing in about $94,000.) Here are a few answers on how self-employed individuals’ taxes will be affected.
Question: Who do I contact as I’m applying to buy insurance through an Obamacare marketplace to make sure I estimate my self-employment income correctly? If I get a subsidy, I don’t want to end up owing thousands of dollars to pay it back.
Answer: Go to the website of your state insurance marketplace or the federal marketplace to get information on how to estimate your 2014 income and to report higher or lower-than-anticipated income as it comes in next year. “All indications show that the taxpayers will be responsible for monitoring their income during the year to ensure that they are receiving the correct amount of subsidy,” Midwood says.
Michael D’Addio, a principal and co-chairman of the health-care reform task force at Marcum, an accounting and advisory company, predicts that the uncertainty around many self-employed individuals’ income will make the subsidies messy. “When people get the subsidy as a premium credit based on their 2012 income and then file their taxes for 2014 and find out they’re ineligible and have to pay it back, there’s going to be a lot of screaming,” he says.
But even diligent individuals who notify their marketplaces that they’ve landed a new client, say, and are making more money than expected, face another problem, as D’Addio sees it: “Say you’ve set aside money to pay for your premiums, then you bring in more income. Your out-of-pocket expense will increase. That makes it difficult to know up front how much to save for your insurance costs.”
On the other hand, he notes, the new law will benefit many individuals with preexisting medical conditions by opening up competitive marketplaces to them.
Question: Under Obamacare, can a self-employed individual deduct health insurance premiums as an expense on line 29 of the 1040 tax return as in the past?
Answer: The ACA made sweeping changes to the health-care market, but it did not substantially change the individual health insurance deduction. As always, the line 29 deduction is available to those whose business income shows a profit, D’Addio says, and who are not eligible for employer-provided insurance, either from a side job or a spouse’s job.
If you list unreimbursed medical expenses, including insurance premiums, as itemized deductions on your Schedule A, you can continue to do that, Midwood says. You would list the actual out-of-pocket cost to you, not including any subsidy you receive.
Obamacare does raise the threshold for that deduction starting in this year, however, unless you are 65 or older. “You can only deduct medical expenses to the extent that they exceed 10 percent of adjusted gross income,” D’Addio says. “It used to be if they exceeded 7.5 percent.” The 10 percent threshold will apply to everyone, regardless of age, after 2017.